Tax options for livestock producers with herd reductions

AMARILLO – Extreme weather conditions experienced during recent years have caused property damage and early livestock liquidations for many Texas agricultural producers, and as a result, tax implications, according to a Texas A&M AgriLife Extension Service specialist in Amarillo.

These unplanned events often create more revenue than usual in a given year, generating income tax issues, said DeDe Jones, AgriLife Extension risk management specialist. For example, in a typical year any gain on property loss reimbursement or the sale of livestock is subject to taxes.

Several options, including Internal Revenue Service Form 4684, IRS code 1033 and IRS code 451, are available to help farmers and ranchers deal with these weather-related issues in excess of normal business practices, Jones said. She encouraged producers to contact a tax accountant to determine the option that best fits their operation and business plan.

At the end of 2012, 90 percent of Texas counties had some form of drought designation and state reservoirs were only 66 percent full, she said. This situation fueled wildfires, ruined crops and pastures, and strained economic resources.

During the 2011-2012 season, approximately 41,823 fires scorched 4.15 million acres and 3,007 homes in Texas. Damages were particularly severe in the Panhandle region due to strong winds, unseasonably warm temperatures and low humidity, Jones said.

In addition, the price of hay increased by 200 percent during this time, causing feed costs to skyrocket, she said. These factors prompted Texas ranchers to severely cull their herds and sell off large numbers of cattle.

IRS Form 4684 allows producers to postpone reimbursement gains for up to four years, while IRS code 1033 pertains to draft, breeding or dairy animals that will be replaced within a given time period. The final alternative, IRS code 451, allows a one-year postponement in reporting sale proceeds on raised livestock.

Reporting casualty losses on IRS Form 4684 allows farmers and ranchers to defer any gains that result from insurance reimbursements for fire-related losses associated with fences, equipment, etc., Jones said. Producers have up to two years under normal circumstances and four years during times of disaster to utilize any money received for property restoration or replacement.

The replacement period begins on the date their property was damaged, destroyed or stolen, she said. It ends two or four years following the tax year in which the gain is realized. The four-year option is available only to those located in a federally declared disaster area.

To be eligible for deferment, producers must attach a statement to their tax return indicating the date and details of their casualty, the amount of insurance or other reimbursement received, how the gain was calculated and proof of a disaster declaration, if applicable, Jones said.

Under the 1033 election, drought liquidations of breeding livestock are considered involuntary conversions of capital equipment, she said. Gains can be postponed for up to two years in typical circumstances and four years during times of disaster if animals are replaced. The county must be declared a disaster area.

All replacement cattle should be used for the same purpose as the livestock that were sold. For example, beef cows must be replaced with beef cows, Jones said. The taxpayer also has to show that adverse weather conditions caused the sale of more livestock than normal. Gain postponement is only allowed on those animals sold because of the unfavorable weather.

She explained that to be eligible for a 1033 election, producers must attach a statement to their tax return indicating the existence of an adverse weather-related condition, proof of a disaster declaration if applicable, and documentation listing the amount of gain realized on liquidated cattle. They should also show the amount and kind of livestock sold or exchanged, and estimate the number of animals typically sold or exchanged under normal weather conditions.

Section 451 allows cattle owners to postpone gains for one year on raised livestock only, Jones said. To qualify for this election, taxpayers must show that their principal business is farming or ranching and use the cash method of accounting.

The rules further state the producer should demonstrate that the livestock would normally have been sold at a later date but were liquidated early due to drought, she said. Additionally, they must provide proof that the sale of livestock was caused by weather conditions from a region officially declared a disaster area. The liquidation can take place before or after a disaster is declared as long as the same disaster caused the sale. Income can be postponed only on those cattle liquidated as a result of weather-related causes.